On Shifting Online Business Models: Death to Ads!

Business Practice

On Shifting Online Business Models: Death to Ads!

by Andrew Swenson

image credit: A. Drauglis Furnituremaker

It’s one thing to talk about how to leverage new social platforms to do business better. It’s another to talk about shifting business models to adapt to the current state of the web.

I think we’re doing well to address the former. My RSS reader is brimming with shining examples of how to engage, execute and measure social media tactics. But the critical conversation that I don’t hear as much about (and maybe it’s because I’m looking in the wrong places) is about how to shift our business modles themselves to better fit into a world where networks are no longer the exception but the norm.

Capitalism hasn’t changed

There is a common denominator in a capitalist economy:

No matter of how we structure our business models, our end goal is often the same. As Mark Schaefer recently pointed out, both in a post and in my interview with him: although the way we’re doing business is changing, we’re still “trying to more to more people for more money more often.”

I don’t think social business changes that.

I’ve argued that in the future, connection may be more important the products as we embrace social business models. According to Stowe Boyd, these soical business models will not simply fix what’s broken, but will be a complete departure and replacement of the old way of doing business:

In the final analysis, this seems like yet another example of paradigm change. Kuhn [link mine], in The Structure Of Scientific Revolutions, detailed the research that demonstrates that schools of thought fail and are replaced by revolutionary viewpoints exactly when the old theories cannot explain what is happening in new research.

The ad barrier

I think this paradigm change should start with how we think about the ad-based business model. It’s no secret that newspaper and magazine revenues are down. Just as a snapshot, business magazine ad revenue in 2009 was down as much as 46% for some tiles (Inc. to be exact).

Although online advertising has made a bit of a comeback, it’s time to see the writing on the wall: in an online environment driven by networks, only a few (Google, Facebook, YouTube) stand to make significant gains with ads.

This of course is not a novel suggestion. Earlier this month, venture capitalist and potty-mouth Dave McClure called all who are reliant on ad-based online business models “lazy, ad-happy, Web-Tards with crappy ROI.”

The ad business model assumes that you will create a frequent-use product (Google, Facebook, YouTube) that will drive some insane amount of traffic.

But as wetoku co-founder David Lee points out, even if you create a product that can be used frequently and scale quickly, “Chacnces are, your product and your company sucks (if we use Twitter, Facebook or YouTube as the standard of non-web-tardism).”

Not everyone wants your product

Which means we have to settle for a smaller number of people using our products.

Which means ads simply aren’t going to cut it.

Which means we have to get people to pay for our products in the first place.

In his rant on web-tardism, McClure points to an excellent article on the penny gap: the reality that it’s much harder to get consumers to pay one penny for what you’re offering than it is to convince them that your product is worth $5 instead of $1.

Place your focus on closing the penny gap

Given that an ad-based model for online revenue probably won’t work for your business, and given that there are relatively few people who actually want to use your product, I think we should start talking about how to aquire new customers at the minimum possible cost (instead of spending all our time talking about effective social communication and measurement).

I’m not just talking about building trust via social networks.

What I mean is, we need to think about how people share information via networks in order to structure out business models around them.

Sure there’s the freemium model, but that has its limitations. What if you can’t convert free customers to paid customers?

What about structuring our business models like Cory Doctorow who makes a boat load of money, even though he gives away his the exact same content of his books online? (Doctorow’s model isn’t really freemium, it’s more like just plain free.)

Or what about cutting out free altogether?

What’s your take?

How do you see the future structure of business models?

Will we see an increase in subscriptions and transactions (and less ads) as McClure claims?

Will freemium replace ads as the defacto business online business model?

Will something else take it’s place?

If you have an opinion. please share it. Let’s continue this critically essential conversation.

-Andrew

Image credit: A. Drauglis Furnituremaker on Ficker; see original for copyright info

No related posts were found, so here's a consolation prize: We’re not all marketers now.

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http://www.mac-live.com Shane Mac

You know how I feel about this. Ads for me are a waste of life. I strive to take the online – offline and vice versa.

Hopefully we can figure out our own Penny gap. Great post too BTW.

http://wordpost.org Andrew Swenson

Yep, we're on the same page.

That's a good thing I suppose. Now on to killing that penny gap…

http://www.blogcastfm.com/ Srinivas Rao

I'm definitely a member the “ads are worthless” party. For me, my money has mainly come from services and of course looking at different potential passive income streams. I'm moving towards setting up the right passive income streams for my blog over the next few months. Great ideas in this post and definitely a subject that needs more attention.

http://wordpost.org Andrew Swenson

Thanks Srinivas.

When it comes to blogs, ads any more are a horrible way to make money. Copyblogger did a piece not too long about about “How to Do 500 Times Better than Adsense” not too long ago. Seems to hit the nail on the head for the blogosphere:

http://www.copyblogger.com/better-than-adsense/

getyourbizsavvy

Google adsense is so ineffective. I see people moving away from that as time goes by. I think the future holds lots of innovation: people creating new money making opportunities on the web. Each day I think about ways to stay away from ads even though I currently have a few. I definitely expect some change.

http://wordpost.org Andrew Swenson

Thanks for stopping by!

As I mentioned my comment to Srinivas above, Copyblogger called out Adsense not too long ago: http://www.copyblogger.com/better-than-adsense/

But I am curious, are the ads you do have making you an significant amount of money—I mean, in relative terms are they worth keeping around?

bradfordshimp

Interesting thoughts. I think businesses do need to build their own networks, but they also need to be able to reach out to other networks. Mass ads may go away, but I think they will be replaced by more targeted advertising. For businesses, it will be about developing relationships with their community and with the leaders of other similar communities.

http://wordpost.org Andrew Swenson

I think I may be on the same page…I'm all for targeted advertising to help build my business, I just don't want to rely on it to fund my business. Does that make sense?

bradfordshimp

I assume by “fund” you mean to continue to bring in customers. The problem with throwing out advertising for “moral reasons” or “idealogical reasons” is that whatever else you do in marketing will always feel like a compromise. Instead of not doing ads, how about doing ads better? What if you do a an ad for a free educational event, in which you teach something of value for free, but also in which you get your name out there in hopes of making some sales?

Okay, I am just free-styling there. But I don't think ads are bad. I ignore maybe 99% of ads, but at the same time, most of the products I own or use I found via ads. A few I have found via interaction on social media, but that is relatively new and very limited. If you can make a business just by being involved in a community, that is wonderful. But aren't you leaving people out who don't know about the community, but who could also benefit from your services?

And I guess that is the big point for me. If you business provides benefit, you should do whatever you can to get the word out to as many people as possible.

http://wordpost.org Andrew Swenson

And are we on the same page? Haha!

http://www.contentandstrategy.com/ Chris Walsh

I feel it's more about how both traditional and non-traditional advertising will be aligned together in the future of business communications, rather than which model will prevail. There will always be a need and place for traditional advertising, not for everyone or every product of course, and there will be more non-traditional methods of online advertising aligned with consumers in their social networks.

These social networks of course give us an insane amount of information and resources to build smart marketing strategies with (especially with great data-mining tools like Gist, uberVU, Trackur, etc…), but I feel the current problems with ads today is that too many businesses and publishers are trying to cram traditional tactics down non-traditional holes, and that's what causes diversion. There needs to be more relevance and risk taking with business marketing & business models, and they need to RELY on those who understand social communications.

http://wordpost.org Andrew Swenson

I agree that there will always be a place for advertising, traditional or not. I just don't want to fund my business with those ads.

I also hear you when you say that too many are trying to cram traditional tactics down non-traditional holes, but how are you thinking about non-traditional advertising? Other than the relational type of social media interaction, how do you see social communicators creating and using non-traditional advertising?

(Please don't read those questions in a malicious way, I really am curious how you see this…)

http://www.contentandstrategy.com/ Chris Walsh

One trend I'm a huge fan of (and maybe it's just that I'm paying more attention to them now) are webcast and podcast sponsorships by a brands and businesses. There's an extra step taken in holding real-time events online, bringing in experts or leaders in certain areas of technology, business, communications and so on. It builds loyalty with the act of helping; offering key insights and education to their consumers. It also opens them up to more risk with two-way conversation by being in the now, as opposed to static set-it-and-forget-it advertising.

I think it will be important to focus the future of online advertising with community-oriented tactics. And I'm not meaning community-oriented as in “online community”, but rather, for the good of the community, be it online or off.

I hope Im making sense with my brain-dump there, let me know if I'm not :p

http://wordpost.org Andrew Swenson

I think I'm picking up what you're putting down. At some point though, we have to cross in to the hairy realm of semantics so that we're both talking about the same thing. I think (and I could be reading this wrong) I would describe what you're talking about as content marketing—which is essential to marketing in 2010.

So now that we're on the same page, I think that you're exactly right in saying that for business promotion the issue is how “traditional and non-traditional advertising will be aligned together in the future of business communications, rather than which model will prevail.”

However, what I'm standing up against in this post is creating a business (read: platform) in which the primary source of revenue is from other people paying to advertise on the platform I own. I think that turns us all into neo-billboard owners and ignores how communities interact.

Am I making an sense with the point I'm trying to make? Am I all wet here?
http://www.contentandstrategy.com/ Chris Walsh

Haha, no totally, you are making absolute sense, and yes I'm talking more about content marketing aligned with online business strategy rather than ad based revenue business models. I don't have the experience in creating revenue through those methods, so I just started by posting with what I know, which is developing strategy and dynamic content to pull interest online rather than push through traditional banner ad/online ad tactics.

But like what Bradford said above and what I was talking about with all the information being aggregated online through social networks, I do believe that “blast ads” or mass advertising is a dead-end form of online advertising, being replaced by targeted advertising and strategies that “pull” rather than “push”.

And you made the point of how that reduces the amount of users and market share for online businesses/platforms to make money with. To me, this only means that you have to be savvier in your advertising delivery to still make money.

For one, I truly believe developing and optimizing your online business to be accessible on mobile devices is going to be huge for any business, be it an online business or a brick-and-mortar store. Geo-based marketing offers the opportunity to reach a very specific demographic that is very valuable, even if it has less reach.

Putting a paywall on a service or platform is generally a death sentence, I believe. Unless a service is very very very unique, people typically shift to similar platforms once the accessibility requires a fee. There is still opportunity to create revenue with advertising through online businesses and platforms as long as they change with the tides of social communications. The standard ad-based model is dead, yes. Developers just need to create revenue through other advertising methods with their online businesses (sponsorships, webcasts, geo-based targeted marketing, etc.).

The consumer still has wants and needs, we just have to cater to them on a personable level with smarter strategies. Pull, not push. And with dialogue, not monologue.
http://wordpost.org Andrew Swenson

If only everyone understood as well as you do the of idea pull you're talking about, or “inbound marketing” as Hubspot calls it, maybe we'd have more meaningful relationships with companies and less douchey marketing crap to deal with every day.

Thanks for adding that to this conversation Chris. This conversation has been more interesting for me than the original post anyway.

http://www.pursuitofchange.com/ Mike Tiojanco

Are we talking just standard Ads (e.g. you get paid to have this up on your site for a month, adsense, etc)? If so I'm in total agreement that for just about everyone they're a total waste of time.

However, I do see value in having relevant affiliate ads on your platform. Offering and recommending worthwhile products benefits both you and your audience.

I think that might be the key though – only recommending products you actually use and can stand behind.

Thoughts?

http://wordpost.org Andrew Swenson

Mike,

The model you're talking about is *far* better than the standard ad model. I'm actually offering free space here for those businesses that I can stand behind–but then again, I'm not making any money off of those (nor do I hope to in the future).

The reason that I'm hesitant to commit to affiliate ads is that I'm still stuck in the traffic problem…I have to sell people on the value of coming to my site, using my site, and then on the value of buying those products.

What seems to make more sense to me is selling them on the value of my product and charging them a fee to use it.

What do you think? Are you using any affiliate ads now?

http://www.pursuitofchange.com/ Mike Tiojanco

Oh I'm definitely still “stuck in the traffic problem,” as I'm still in my first month blogging

I've signed up for the affiliate programs for stuff I really use and found valuable, but haven't implemented the ads on my site yet. Very soon though, as I am trying to avoid the future outcry of “you used to just be a blog and now you're trying to monetize us all you sellout!”

I've done a little with affiliate sales in the past just with people I know either on twitter or in “real life,” and I'm always up front with them. “I really like this product and think it would be great for you. If you do buy from this link, I do get a small kickback as the affiliate.”

For your own stuff it sounds like you are thinking membership site? Down the line I'm definitely planning to have my own products, but I don't think I'll get away from the affiliate stuff completely. Seems like the classic Office “win-win-win” negotiation. The producer of the product gets a sale, I get a kickback, my reader gets an awesome product, and we all feel good about helping each other… Precious…

http://ryanstephensmarketing.com/blog/ ryanstephens

I'm in agreement, and like Mike mentioned earlier I don't necessarily have a problem with affiliate-type ads in which you believe there's some value for your customers. Besides, chances are you put a lot of hard work into your blog and you deserve some monetary compensation.

I think part of the problem is so many bloggers are fearful of taking the steps to make money. Whether it's a confidence issue or what I don't know, but I fall into the Jason Fried camp of if you have a product, service, etc. you should start charging on Day 1. It's often too hard to get people to upgrade later after they've been receiving it for free.

Obviously depending on the product/service/business model it can get a lot more complex than that, but I think that's a valid rule of thumb and obviously one that's made him successful in his career thus far.

http://wordpost.org Andrew Swenson

Ryan,

The Jason Fried example is timely and appropriate for this conversation, thanks for bringing that up. Get Satisfaction just upgraded some of its premium plans, but in doing so took away two options from it's free plans (http://blog.getsatisfaction.com/2010/02/24/ahem… ).

The issue of dealing with upset “customers” could have been completely avoided if they would have kept their free options as stripped down as possible in the beginning. Considering the circumstances, and that it's tough to predict how markets will respond to your offerings, I think they're doing the right thing.

Thanks for commenting.

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